AML Glossary – “H”

The United Nations and the Organization for Economic Cooperation and Development have taken the controversial position that a country that has no or low tax rates to encourage foreign business development is engaged in “harmful tax practices.” Their position is that offshore tax regimes are not maintained with the intent to attract real business and direct foreign investment, but to foster predatory tax policies that divert business from another country and encourage tax evasion.

Hawala

A funds exchange system in Indian and Chinese civilizations used to facilitate the secure and convenient cross-border movement of funds. Hawala was born centuries before Western financial systems. Merchant traders wishing to send funds to their homelands would deposit them with a hawala broker or hawaladar who normally owned a trading business. For a small fee, the banker would arrange for the funds to be available for withdrawal from another banker, normally also a trader, in another country. The two bankers would settle accounts through the normal process of trade. Today, the technique works much the same, with businesspersons in various parts of the world using their corporate accounts to move money internationally for third parties. Deposits and withdrawals are made through hawaladars, rather than traditional financial institutions. The practice is vulnerable to terrorist financing and money laundering—funds do not actually cross borders, and transactions tend to be confidential, as records are not stringently kept. In Pakistan, the system is called hundi. See Alternative Remittance System.

Hedge Fund

A hedge fund is a privately offered investment vehicle—typically high-risk— in which participants’ contributions are pooled and invested in a portfolio of securities, commodity futures contracts or other assets. Investors are usually of high net-worth, and can generally redeem investments on a quarterly, semi-annual, or annual basis.